564 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
d. Briefly describe the current international monetary system. What are the different types of exchange rate
systems?
e. What is the difference between spot rates and forward rates? When is the forward rate at a premium to the
spot rate? at a discount?
f. What is interest rate parity? Currently, you can exchange 1 yen for 0.0095 U.S. dollar in the 30-day forward
market, and the risk-free rate on 30-day securities is 4% in both Japan and the United States. Does interest
rate parity hold? If not, which securities offer the highest expected return?
g. What is purchasing power parity (PPP)? If grapefruit juice costs $2 a liter in the United States and purchas-
ing power parity holds, what should be the price of grapefruit juice in Australia?
h. What effect does relative inflation have on interest rates and exchange rates?
i. (1) Briefly explain the three major types of international credit markets.
(2) Briefly explain how ADRs work.
j. To what extent do average capital structures vary across different countries?
k. What is the effect of multinational operations on capital budgeting decisions?